HCL Tech Results Analysis:: Nitin Prakash Daga, Microsec

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HCL Tech posted its results for Q3 FY2011 on 20 April 2011. The company’s results came above the consensus estimates and beat its larger peer Infosys on key growth parameters. HCL registered a healthy 5.8% QoQ increase in top line, in US$ terms, while its bottom line, denominated in US$, grew even faster at 17.6% sequentially. A glimpse of the company’s Q3 and 9M FY2011 results in US$ terms is as follows:

  

In ` terms as well the company’s top line grew healthy 5.6% QoQ (32.6% YoY) to `4,077.9 Crores while its bottom line sequentially increased robust 16.2% (34.1% YoY) to `461.3 Crores in Q3 FY2011. Although a pressure on EBIDTA Margins is directly visible to support its robust growth, HCL was able to report an improvement in PAT margins. In absolute terms as well, the company was able to compensate the dip in margins with high growth in top line, which eventually trickled down in profits.

Our View: HOLD

HCL’s performance, in recent quarters, has remained better than its larger peers in the IT space. We believe that the company’s ability to pacify growth in the Non-US geographies may help it maintain these growth levels in the upcoming quarters as well. At CMP of `509.35 the company currently trades at a TTM PE of ~22.3x, compared with PE’s of ~24.4x and ~27.8x for Infosys and TCS, respectively (Time:11.30 AM). Considering the company’s lower margins profile, we believe that the current PE discount is justified. However, maintenance of high growth levels in the upcoming quarters may produce some more room for narrowing this gap. As a result, we suggest a HOLD on the stock at current levels.

(Source – PE Data: Bloomberg)